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Jobs Report Sends Stocks Soaring

U.S. stocks were up sharply to end a volatile week. The rally came after a strong jobs report that showed the U.S. economy added 266,000 jobs in November. Low unemployment and rising wages support hopes that the consumer sector is strong enough to prevent weakness in the manufacturing sector from spreading to the broader economy. In that vein, the global manufacturing sector was dealt another blow today from a disappointing German industrial production report. However, European equities were higher on the day. Asian equites were also higher, despite some mixed economic data out of Japan. Oil was up following a two-day OPEC+ meeting that yielded an agreement to cut production. Gold fell and the dollar rose, as U.S. Treasury yields moved higher.

The Dow Jones Industrial Average (DJIA) was up 337 points (1.2%) to 28,015, the S&P 500 Index added 29 points (0.9%) to 3,146 and the Nasdaq Composite gained 86 points (1.0%) to 8,657. 850 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil added $0.77 to $59.20 per barrel and wholesale gasoline was $0.03 higher to $1.65 per gallon. Elsewhere, the Bloomberg gold spot price was $18.10 lower at $1465.10 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.3% to 97.68. Markets were mixed for the week, as the DJIA and Nasdaq Composite dipped 0.1%, while the S&P 500 Index advanced 0.1%.

Ulta Beauty Inc. (ULTA $269) reported Q3 earnings-per-share (EPS) of $2.25, or $2.23 ex-items, above the $2.13 FactSet estimate, as revenues rose 7.9% year-over-year (y/y) to $1.7 billion, roughly in line with the Street's expectations. Q3 same-store sales rose 3.2% y/y, matching forecasts, while its gross and operating margins came in north of projections. ULTA narrowed its full-year guidance. Shares rallied over 10%.

With the retail sector in focus amid the all-important holiday shopping season, the Schwab Center for Financial Research delivers our latest, Schwab Sector Views: 'Tis the Season for Consumer Discretionary … or Not?. Meanwhile, with the Street grappling with stock valuations after the markets recently rallied back to all-time highs, Schwab’s Chief Investment Strategist Liz Ann Sonders discusses in her latest article, Any Weather: Valuations Say Stocks are Cheap and Expensive, how market valuation is always a factor; but often misunderstood is the vastness of the spectrum of metrics, and the sentiment nature of valuation.

DocuSign Inc. (DOCU $75) posted a Q3 loss of $0.26 per share, or EPS of $0.11 ex-items, compared to the forecasted $0.03 per share profit, with revenues rising 40.0% y/y to $250 million, north of the estimated $240 million. The eSignature solutions company issued Q4 revenue and billings guidance, while it raised its full-year outlook. Shares were nicely higher.

November nonfarm payroll and consumer sentiment reports trounce forecasts

Nonfarm payrolls (chart) jumped by 266,000 jobs month-over-month (m/m) in November, compared to the Bloomberg forecast of an 180,000 increase. The rise of 128,000 seen in October was revised to a gain of 156,000 jobs. Excluding government hiring and firing, private sector payrolls increased by 254,000, versus the forecasted gain of 178,000, after rising by 163,000 in October, revised from the 131,000 increase that was initially reported. The Department of Labor said notable job gains occurred in health care and in professional and technical services, while employment rose in manufacturing, reflecting the return of workers from a strike. Employment continued to trend up in leisure and hospitality, transportation and warehousing, and financial activities, while mining lost jobs. Job growth has averaged 180,000 per month thus far in 2019, compared with an average monthly gain of 223,000 in 2018.

The unemployment rate dipped to 3.5% from October's 3.6% rate, where it was expected to remain, while average hourly earnings were up 0.2% m/m, below projections of a 0.3% increase, but October's initially-reported 0.2% rise was adjusted upward to a 0.4% gain. As such, y/y wage gains were 3.1% higher, versus estimates of a 3.0% pace, and versus October's upwardly-revised 3.2% increase. Finally, average weekly hours remained at 34.4, matching estimates. The labor force participation rate dipped to 63.2% from 63.3%.

Today's upbeat Labor Report followed yesterday's unexpected drop in jobless claims to aid sentiment as employment data continues to be a key to watch for any signs of a breakdown in the bifurcation in the economy between weak manufacturing/capex and stronger services/consumption as discussed by Schwab's Liz Ann Sonders in her article, Split Personality: U.S. Economy's Bifurcation Persists.

The December preliminary University of Michigan Consumer Sentiment Index (chart) rose to 99.2 versus expectations of a 97.0 reading and compared to November's 96.8. The index posted the highest level since May as both the current conditions and expectations components of the survey improved. The 1-year inflation forecast dipped to 2.4% from November's 2.5% rate, and the 5-10 year inflation forecast fell to 2.3% from November's 2.5% pace.

October wholesale inventories (chart) were revised lower to a 0.1% m/m gain, from the preliminary estimate of a 0.2% rise, where it was expected to remain, and compared to September's unrevised 0.7% drop. Sales were down 0.7%, following September's negatively-revised 0.1% dip.

Treasuries fell following the employment data. The yields on the 2-year note and the 30-year bond rose 2 basis points (bps) to 1.61% and 2.28%, respectively. The yield on the 10-year note is gained 3 bps to 1.84%. For a look at fixed income investing, check out Schwab's Chief Fixed Income Strategist Kathy Jones' commentary, The Bond Investors' Dilemma, and her latest video, Investing in Bonds with a Flat to Inverted Yield Curve.

Europe higher on mixed data and trade focus

European equities were higher despite a larger-than-expected drop in German industrial production. The German data continued to suggest the global manufacturing sector remains hampered and exacerbated by a struggling auto sector. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, delivers his article, Will The Crash in Autos Drive The End Of This Cycle?, noting that this auto-led downturn may be less damaging to the global economy than the housing bust was 10 years ago, but automobile manufacturing still accounts for a sizable amount of production, debt, and jobs. The euro traded lower versus the U.S. dollar as European bond yields fell, while the U.S. saw higher rates. The British pound gave back some of this week's solid gains that came amid rising expectations that the Conservative Party will win next week's general election, which could bring the best case Brexit scenario of the U.K. leaving the European Union with a deal in place.

Stocks in Asia finished mostly higher amid mixed data. Japanese data showed the nation's household spending fell more than expected, leading indicators surprisingly dipped and earnings were stronger than expected. The global markets continue to grapple with mixed headlines regarding the potential for a "phase one" U.S.-China trade deal ahead of the December 15 deadline for further tariffs on Chinese goods to be implemented. With trade remaining a key focal point for the markets, Schwab's Jeffrey Kleintop, offers his commentary, Tied to Trade: What's Next for Emerging Market Stocks?.

Oil prices were higher following the two-day OPEC+ meeting, which concluded with a pledge of deeper-than-expected production cuts and Saudi Arabia announced even deeper cuts than the deal required. A modest disappointment came from the duration of the agreement, which will only run through March.

Stocks and sentiment whipsawed by trade and data

U.S. stocks began the week on shaky footing with some relatively upbeat manufacturing reports out of China, the Eurozone and U.K. being outweighed by an unexpected acceleration in the contraction for the sector in the U.S. as noted by the ISM Manufacturing Index. The pressure on stocks intensified as optimism regarding a "phase one" U.S.-China trade agreement was challenged by President Donald Trump saying at the NATO summit that it might be better to wait until after the 2020 election to strike a deal. However, as hump-day rolled around stocks and sentiment reversed to the upside as the ISM non-Manufacturing Index showed growth continued—albeit at a slower pace—for the services sector, which carries more economic weight than its manufacturing counterpart. Also, President Trump contrasted his earlier remarks by noting that talks with China were going well. The week's recovery culminated with Friday's blowout November employment figures and stronger-than-expected December consumer sentiment report. When the dust settled, the Dow and Nasdaq ended with modest weekly losses but the S&P 500 managed to post an eighth gain in nine weeks, putting in on track for a sharp Q4 advance. Despite a late-week recovery, the U.S. dollar finished the week lower, while the Treasury yield curve steepened. Gold nudged higher and crude oil prices jumped in the lead up to the expected deeper production cuts from OPEC+ members. The energy sector outperformed for the week, along with consumer staples, health care and financials, though tech, industrials and consumer discretionary stocks registered red figures.

Next week, the economic calendar will likely remain a key catalyst for the markets, with the docket delivering some key November reads on the other side of the Fed's dual mandate—inflation—courtesy of the Consumer Price Index (CPI), the Producer Price Index (PPI) and the Import Price Index. Also, November retail sales could garner attention amid the key holiday shopping season and intense focus on the all-important consumer, while reports on jobless claims, the NFIB Small Business Optimism Index, and revised Q3 nonfarm productivity and unit labor costs, are poised to command some focus. However, the Federal Open Market Committee's (FOMC) final monetary policy meeting of the year has the potential to be a pivotal event for the markets. Although the FOMC is highly-expected to leave its fed funds target unchanged after three cuts this year, the announcement will be accompanied by updated economic projections and followed by the customary press conference from Chairman Jerome Powell that could see heavy scrutiny in the wake of Friday's stellar Labor Report.

As noted in our latest Schwab Market Perspective: Are We There Yet?, recent hiccups in U.S.-China trade talks and uncertainty around a "phase one" deal have reaffirmed that trade headlines continue to drive larger market swings. Key U.S. economic data has been on the weaker side—holding the United States back from participating in an emerging global manufacturing recovery. Negative interest rates around the world have created favorable financing conditions for manufacturing firms, harboring the global labor market from a downturn.

The international economic calendar will also be robust and may help drive market action, with reports worthy of a mention including: Australia—consumer confidence. China—trade balance, CPI, PPI and lending statistics. India—trade balance, CPI and industrial production. Japan—Q3 GDP, core machine orders and Q4 Tankan Large Manufacturing Index. Eurozone—investor sentiment, industrial production and the European Central Bank monetary policy decision, along with the German trade balance. U.K.—October GDP, industrial/manufacturing production, and the Bank of England 12-month inflation forecast.

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Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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